Has Employment Peaked?
A more robust look at jobs data may hold the answer.
Stock Strategist
We've had a significant slowdown in economic growth in recent months. Continued deterioration in housing and related sectors has coupled with greater weakness in some important durable-goods industries. Amid worrying weakness in leading economic sectors, some government data were suggesting that employment had been holding up relatively well heading into late 2007. But the latest data are suggesting some chinks in the armor there as well. In Friday's national employment report, payrolls barely increased in December. Labor markets and consumer spending bear watching closely for signs of any intensifying recession.
Watching Labor Markets
Getting a good, timely read on the employment situation isn't like calling 411. Counting heads isn't as easy as it might seem. No single indicator out there is perfect. The available survey methods differ, and they can do funny things around economic "turning points" (expansion turning to recession, and vice versa).
Friday's headline number is not necessarily the truth. These reports are estimates--and subject to revision. Given past performance, it is possible that employment has already peaked.
To get a sense for the reality under the data, the best route involves looking at various data sources as well as anecdotal evidence all together, and forming a judgment based on a big-picture overview.
Some of the official government labor data worth digging into include the monthly establishment (or "payroll") survey, the monthly household survey, and weekly reports on unemployment insurance claims. Private indicators worth watching include the employment components of the national and regional purchasing manager surveys, and reports from employment services firms (more on the latter in a moment).
Comparing Payroll and Household Surveys
The U.S. Department of Labor produces monthly reports based on the payroll and household surveys, but these surveys differ significantly. The payroll survey polls companies, while the household survey polls people in their homes. The payroll survey is based on a sample of firms, with statistical methods used to adjust those results and estimate total employment throughout the country.
The household survey is also based on a sample, with the results adjusted statistically to produce a national estimate. The household survey, not the payroll survey, produces the widely reported "unemployment rate." But the household survey also produces a lesser-noticed but important estimate for total employment as well as unemployment. The household estimate for total employment is significantly more volatile on a month-to-month basis than the payroll data. However, the relative smoothness of the payroll data does not always equal precision.
The methods used to sample and statistically adjust the payroll data for trends in establishments outside the sample involve art as well as science. Some of the ambiguities involved there have led the establishment survey to produce remarkably false signals in the past. For example, heading into the 1990 recession, the initially reported state sample results were holding up well in late 1990 and early 1991, but later revised downward significantly when the "universe" data were compiled a year after the recession started.
The state-level data are aggregated by the Bureau of Labor Statistics (BLS) in the Department of Labor, and the national data take note of the possibility that out-of-sample trends may not match the sample totals. But these methods have historically been insensitive to trends at turning points. In 1992, for example, the payroll data were initially showing little if any economic recovery, even as a good one was really under way. On the other hand, the employment total in the admittedly bouncy month-to-month report from the household survey was showing a complete recovery by year-end 1992. Ultimately, the payroll data were revised more closely in line with the household number. The BLS has been working hard to improve its statistical techniques, but that experience still cautions observers not to put too much stock in any one indicator.
Where Else Can We Turn?
In 1992, reports from private employment services firms were giving off signals that things were picking up significantly, even as many market commentators and a presidential election were fixated on the payroll data and a still-high unemployment rate as evidence that we were in a "jobless recovery."
Ultimately, the payroll numbers were revised upward sharply. It made sense then, and it makes sense today, to pay attention to the surveys and personal observations of people working in the employment business. That's where Morningstar's Joel Bloomer comes in. Joel covers employment services firms such as Manpower (MAN), Kelly Services (KELYA), and Robert Half (RHI). His analysis can offer a good supplement to the standard measures.